Why is CARB giving insurers a pass on climate?

A regulatory agency giving special treatment to big business has become sadly commonplace. But who would expect it from a respected environmental agency in the Golden State?

The California Air Resources Board (CARB) has decided to give the insurance industry a pass as it works to implement the first-in-the-nation climate risk disclosure framework, which will require companies doing business in the state to assess and disclose their climate risks in a warming world. Critically, too, consumers and watchdogs will have the data they need to interrogate green claims by businesses and to separate the climate leaders from the laggards. 

The CARB recently voted on and adopted its first of several rules to implement two landmark bills: SB 253 and SB 261, which became law in fall 2023. SB 261 requires narrative climate-related risk disclosures,* while SB 253 requires covered entities to disclose their planet-heating emissions. This first rule included key definitions, the fee structure for covered companies, and a narrow set of exemptions for sectors such as government agencies and nonprofits, as the Legislature directed.

But the CARB added one exemption of its own: the multitrillion-dollar insurance industry, whose CEOs are driving an unprecedented insurance crisis in California. At the heart of the growing crisis is fossil-fuel-driven extreme weather. As the planet heats up, extreme weather is becoming more frequent, severe and costly. Wildfires fueled by record heat and drought have ripped up lives across California, and atmospheric rivers have flooded homes and businesses. Each day, longstanding policyholders are being shortchanged, swindled and abandoned in their time of need by some of the richest corporations in the world. 

The insurance sector has predicted the climate impacts we are seeing now for decades as a result of their sophisticated forward-looking catastrophe and climate risk models. They have also been leading enablers of the fossil fuel industry. They invest billions into oil and gas securities, as well as insure fossil fuel projects directly. 

The CARB's carbon emissions disclosure rule is most relevant for sectors like insurance, which, like the fossil fuel and banking sectors, are the leading drivers of climate change. Yet, for reasons that remain murky, the CARB decided to exempt this entire industry from the emissions disclosure law SB 253, which categorically did not include the exemption. In fact, at the rule's final hearing on Feb. 26, bill author Senator Scott Wiener testified:

"The Legislature's intent with respect to the insurance industry is crystal clear. It was excluded from SB 261, and it was not excluded from SB 253. So the law of California is that the insurance industry is included in SB 253's carbon disclosure requirement... I do not believe that the board has the authority to remove an industry that was included by the Legislature."

Rather than standing down after the bill's own author pointed out the agency's error, the CARB unanimously adopted the rule as is, with the exemption for an immensely powerful industry that is causing real harm to Californians today. 

The reasons remain unclear, and the CARB has given a series of shifting justifications for breaking with the statute--not all of which the public had an opportunity to weigh in on as required by administrative norms.

In the CARB's Initial Statement of Reasons--the justifications for the rule as proposed--it explained the insurance exemption as a way to maintain "continuity" with companion legislation SB 261, which statutorily exempted insurers. The notice and comment period lasted through the final hearing on Feb. 26, giving ample time for stakeholders to reflect and comment. Many groups refuted the "continuity" rationale, including Public Citizen. Apparently, our arguments were persuasive enough that the CARB manufactured a distinct and more elaborate rationale that it only shared with the public on the same day the rule was adopted. This is a violation of APA standards, which inform the rulemaking process in California. OAL's own guidance provides that: 

A rulemaking agency must specifically identify any material the agency is relying upon for the proposed rulemaking in the initial statement of reasons. If during a rulemaking proceeding an agency decides to rely on material that the agency did not identify in the initial statement of reasons, the agency must make the document available for comment for 15 days. This notice and comment process is similar to the 15-day notice for substantial, sufficiently related changes to the regulation text.

It is unclear whether the CARB relied on particular "material" or a "document" in presenting its novel duplication justification for the insurance exemption at the Feb. 26 public hearing. It is clear, however, that the public did not have opportunity to review and comment on that rationale, flouting the purpose of notice and comment rulemaking. This is especially true in light of the significant public interest in the exemption and the amount of controversy it has engendered.

There is still time for the CARB to correct the rule consistent with statute and protect itself from possible legal challenge. It is currently preparing the final rule package--including responses to public comment and the Final Statement of Reasons--for the Office of Administrative Law (OAL), which has the final say on the matter. The Resources Board is on ample notice of the public's concerns, including a recent letter Public Citizen sent simultaneously to OAL and the CARB warning that the insurance exemption was adopted contrary to administrative procedure and the law.  It has up to one year to submit the final rule package to OAL. If CARB does not correct the unlawful exemption, we believe that the OAL has a duty to send the rule back for amendment.

As federal environmental protections are being discarded to give advantage to corporate polluters, California's climate risk disclosure rules take on a special urgency. Giving insurers a pass, as they raise rates and cut coverage for families across the state, is not the right move. It is also against the law.

*N.B. SB 261 has been stayed pending appeal.